Investment Strategy

Market Thoughts: Let The Great World Spin

I partnered with Nancy Rooney, Global Head of Portfolio Advisory Group, on a webcast this week. We touched on markets and investment positioning. Also, U.S. exceptionalism. Whether it’s in freefall, along with the dollar. Emerging markets and the Fed wove their way into the conversation as did big tech. I’ve included a link to the replay in case it’s of interest. We had a lot to talk about.

Colum McCann’s novel Let The Great World Spin sprang to mind as I sat to write this. The book is built around Philippe Petit’s tightrope walking caper in 1974 between the Twin Towers in lower Manhattan. It’s about America in a moment of social change and transition. New York City was in chaos, on the verge of bankruptcy. Its essence? Learning to stumble and spring back. Made for the moment.

I’ll hit on a few themes from the webcast. There is a great deal more in the replay. Consider this a teaser. In the interim, like the world, markets continue to spin on the great tariff hamster wheel we find ourselves on. Around and around we go. Where this stops, no one knows.

We’re not seeing the end of U.S. exceptionalism. If I had to editorialize that observation, we’ve gone from EXCEPTIONAL to exceptional. The U.S. has been in steady decline since Bretton Woods, post-World War II, by design. The intent? To return growth and geopolitical balance to the global economy.

The U.S. dollar is a little less exceptional. Over time, I expect countries will continue to diversify away from the dollar. Where we go near-term will depend on where we land with tariffs. I don’t know if we’ll see a fast and furious sprint to the exit by international holders of U.S. assets. A ‘slow bleed’—like the one we’re seeing—can continue without spiraling the dollar or markets into freefall.

Countries sitting down to talk trade and tariffs with Washington, through social media posts and podium punditry, are seemingly being encouraged not to let their currencies depreciate against the dollar to compensate for higher tariffs. The Taiwan dollar’s dramatic appreciation is a case in point.

Are international equity markets a panacea for U.S. equity markets under pressure? More directly, do they offer a safe harbor from the current U.S. equity market storm? They have year-to-date, but I believe their relative outperformance reflects more of a bootstrapping up of lagging valuations. If the U.S. falls hard into recession, it’s taking everyone along for the ride.

We invest in global equity markets because they offer the broadest opportunity set and palette to invest in. Investors have just been reminded there’s a great investment world out there still spinning. Take a whirl. But don’t overreact by running away from U.S. markets.

Like tightrope walkers, investors will eventually have enough visibility around trade and supply chains to reprice the risk associated with it. That hopefully encourages animal spirits to spring back. It’s a matter of time and patience. Also, a matter of price.

When we see large pockets of market turbulence there’s always an inclination to make investment decisions through an all-or-nothing lens. If you’re an accomplished and proven day trader, have a ball. That was a phrase my late father-in-law used often. Generally, as words of caution.

I don’t believe we’re seeing the end of U.S. big tech exceptionalism. If we are, global markets will have far greater problems ahead. Equity market forecasts wouldn’t be able to anchor on a +21-22x forward multiple for the S&P as fair value. When big tech is working, markets have proven comfortable trading at those levels. I believe they can again. It’s a question of when.

Where the U.S. lands with Europe on tariff negotiations may have an outsized impact on tech valuations. A true tit-for-tat escalation doesn’t end with goods. Services follow and could prove the Achilles heel to rebalancing trade... one that includes goods and services.

We didn’t talk about strategic asset allocation on the webcast, but it popped up in a conversation with someone I had this week about the CIO team’s investment process. I thought parts are worth sharing.

Investing starts by clearly defining long-term goals. I hear the jeers… thanks, so helpful. I truly believe that. My team contributes to the annual ritual we share with colleagues from Asset & Wealth Management in determining the long term capital market assumptions (LTCMAs) used across our organization. We approach it with rigor and discipline.

It’s important that we bring senior thought leaders together to reconcile where we believe we are in a market cycle. We build from there. A lot of math with scarred experience shared and judgment thrown in for good measure. We are kicking off the process currently.

Where we are defines where we believe we’re going over the next +10-15 years. It’s informed by where we’ve been. LTCMAs are mean reverting over a full macro and market cycle. The day they prove not to be, the great world is no longer spinning.

LTCMAs incorporate current valuation levels, term structure, the state of the global economy, volatility and correlation dynamics across global markets. Also, their historic relationships. For the portfolios we manage they’re the foundation that informs our strategic asset allocation. How much risk goes into a portfolio and what do we expect to be paid for taking it as a long-term investor.

The math over a cycle proves consistent. I always feel the point of the exercise is to ground return expectations around volatility and downside risk. A point I make repeatedly. Understand the drawdown pain point where you’ll blink. Everyone has one. Knowing that will help you stay invested. Ignoring it generally leads to retreat at the lowest point in a market. A bad outcome.

Stocks and bonds are variations on the theme of risk assets. It simply depends on where we are in a cycle for how they trade. Through a cycle they work with synchronous efficiency. Patience is the key to joy, as the great world and markets spin around us.

A fun fact about this week’s photo. It features Petit serving the ‘sentence’ given by the court to publicly replicate his walk along a 600-foot cable above Belvedere Lake in Central Park. It happened three weeks after his Twin Tower escapade. To this day I can’t believe he managed it. I’m grateful he did.

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Market Thoughts: Let The Great World Spin

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